The Debt Beneath, by Northman Trader

Debt is the riptide beneath the ocean of liquidity driven bull markets. From the Northman Trader at northmantrader.com:

Debt is irrelevant and matters not. It’s different this time. That’s the message from politicians, markets and participants. Tax cuts pay for themselves (they do not), leverage doesn’t matter (it does) and the increased costs of servicing the debt as a result of rising rates will be offset by imaginary real wage growth to come (they won’t). But the calmest market waters in history continue to keep these illusions alive as asset prices keep levitating from record to record.

Debt does matter and it was ironically left to Janet Yellen to voice any remnant concerns about the sustainability of debt to GDP: “It’s the type of thing that should keep people awake at night” she said.

With good reason:

After all the debt burden has never been higher and rates, following years of enabling the largest debt expansion in human history, are starting to rise in the US. In the larger historic context rates are still low, but let’s be clear, they are rising:

And with rising rates come questions of the sustainability of servicing incredibly high debt loads.

The worldwide equity rally since the early 2016 lows has resulted in a massive increase in the market capitalization of global asset prices which have increased by over $25 trillion in value since then. As discussed in my 2017 Market Lessons US market capitalization is now north of 143% of US GDP.

Low rates and free money in form of global QE and now US tax cuts make it all possible and consequence free. But is it?

Let’s take a look at the leveraging game over the past 2 years since this is when the most recent rally began. And note in many cases we don’t have full 2017 data yet so I’m using the running 2 year data where I can pull it. The trend is the same: Up, up and away.

Federal debt has increased by $2.1 trillion. Different management, same result and tax cuts will leave a revenue source gap in the long term budget and will add further to the debt:

Corporate debt has increased by over $568B during the same timeframe:

Household debt has increased by $364B:

Revolving debt, you know the one subject to higher rates, is now exceeding $1 trillion, up over $100B in less than 2 years:

Student loans continue to expand unabated, up by another $166B:

And consumer loans on credit cards at commercial banks are up by another $100B since the February 2016 lows alone:

TRADE, NOT AID!

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